Liquidity and Shareholder Activism
Forthcoming The Review of Financial Studies
48 Pages Posted: 16 Feb 2009 Last revised: 21 Jun 2014
Date Written: April 7, 2014
Blockholders' incentives to intervene in corporate governance are weakened by free-rider problems and high costs of activism. Theory suggests activists may recoup expenses through informed trading of target firms' stock when stocks are liquid. We show that stock liquidity increases the probability of activism, but less so for potentially overvalued firms where privately informed blockholders may have greater incentives to sell their stake than to intervene. We also document that activists accumulate more stocks in targets the more liquid is the stock. We conclude that liquidity helps overcome the free-rider problem and induces activism via pre-activism accumulation of target firms' shares.
Keywords: Liquidity, Shareholder Activism, Proxy Solicitation
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation